Cryptocurrency or the digital currency or the virtual currency, no matter what alias you give to the above, the concept remains the same. These are basically virtual currencies meant for the sole purpose of trading or exchange.

A digital form of exchange not driven by a monetary system, cryptocurrencies are frequently used by private firms and organizations to promote financial transfer between peers. Cryptocurrency can bring viewed as your banks debit per credit card with the exception being it is not government regulated. Official institutions have no say over the transaction done through cryptocurrency. On the other hand, all the cryptocurrency transactions are stored in a digital ledger namely blockchain.

A quick recap

 Before we jump on to the working of cryptocurrency, let us have a look at the traditional face of exchange and the one added recently cryptocurrency.

In the traditional form of digital currencies, there existed a central system which would hold all the information related to the interacting parties and the total cash transferred. And this led to issues of privacy and double spending. On the contrary, the all-new digital cash- cryptocurrency is traded in a decentralized network where each party is entitled to perform the task and authorize the exchange. Also, the ledger that holds all the transactions occurring in a single network is made accessible to all members of the network. This in a way eliminates the need of a third party adding a layer of privacy.

Also Read: How Much It Costs To Make A CryptoCurrency Exchange App Like Coinbase?

How Do This Works?

We are not concerned about the technical aspect of the currency but the way it functions and facilitates an exchange. To start with, nearly all cryptocurrencies are a replica of Bitcoin, the first of its kind. Now, each and every currency has a value associated with it. For instance, if you say you have 5 Bitcoin, that might mean you have $5.

Now to understand the working of a cryptocurrency, we need to know a few terms.

• Blockchain

A digital ledger that keeps a record of all the transactions taking place within the network. Often called the master ledger, it also validates ownership of variant units at all time. Being the storehouse of the records of transactions, the ledger owns a finite length that increases with time. Each node in the software of cryptocurrency owns a copy of the ledger and these are run by software experts that continuously work to update and authenticate the said transactions. Until and unless a transaction is added in the blockchain, it stands null and void. For every transaction to be considered legit, there has to be an entry in the blockchain. And once embedded, you can not undo the transaction. Neither of the parties can intervene between the time interval of a request made and approved. That basically lands in kind of escrow and breaks only after the request has been completely answered. This in a way assures that there does not occur any double spending on the same cryptocurrency key.

• Private key

These are keys held by every cryptocurrency holder and used to validate his/her identity. One cannot make a transaction in the absence of a private key. Users can themselves create a private key either by using a random number generator or choosing a digital that is 1-78 digit long. Only after a user owns a private key, can he have a currency and promote an exchange. In the event of not having a key, no matter how much currency do you own, it still stands worthless. So you see how crucial is this private key. Consider the key getting lost, now what?

This is something fatal. As evident that private keys are responsible for performing transactions if lost it could be misused by someone. This is the reason why key holders take immense care while storing the key.

• Wallets

These are temporary units held by the currency holders and has significant information pertaining to the currency. With private keys, you secure your privacy and using Wallets help lower the risk of theft to the units that aren’t used by any of the holders. Every user has a wallet and it is recommended that the wallet has been backed up. Not that this duplicates a transaction but creates a copy of the transactions.

• Miners

These are the tech-savvy individuals that work day and night to record the different cryptocurrency exchanges and authenticate them as and when requested. They testify the accuracy, completeness and the security of the blockchain currencies. This is a huge operation and necessitates the need for a high power of computing. Miners are the one responsible for adding transactions in the ledger and each transaction is uniquely deemed as a block. Block stores all the transaction updated till the last one.

Now that was all about the terms relating to cryptocurrency and it’s transactions. Let’s have a run through at how these function!

Working

Every party owns a wallet. A transaction occurs when one party shares coins with another. Each wallet has a private and public key. Transactions occurs between peers where the one sending money makes use of the wallet and the public key to initiate the same. Also, the person need to have his own private key to transfer funds. The former is restricted and known only to the holder where’s public key is visible to all. However, these are anonymous and under no circumstances reveal the true identity of the currency holder. Transactions take place when two parties reach a consensus and then initiate a request. Once done, the transaction is then broadcasted and added to the queue so that it could be updated in the block chain ledger. This is then scrutinized by a miner to authenticate and validate the same. The fact that cryptocurrency transactions are immutable, integrating mining activity is a must.

It ensures the viability of the parties and the transaction. Only after the miner assures the transaction validity, the same is updated in the ledger turning the same to be legit.

Adding transactions to the ledger is like solving a puzzle and the one who does it first, receives a reward. This could be in the form of a coin or currency. When all miners working on a data confirm the legitimacy, the transaction is then updated to the ledger, making it as complete. This transaction is then stored in the form of the block and connected to the last block, forming it a chain. Blocks are always added in a sequential format and so the name block chain.

Conclusion

No doubt, cryptocurrency is the future of digital transactions. The fact that they are extremely reliable, secured and ensures transactions fidelity turns the odds in its favor. If you too are interested in vest in currency trading, all you need to do is buy a coin base account and choose whether to buy or sell coins.

So, get started!